2 high-yield earnings plays that should crush the broader market in 2023

While a recession in 2023 is far from a foregone conclusion, the possibility of a mild economic downturn sometime this year is a major concern for investors. Fortunately, stocks that pay above-average dividends often make excellent investments as a safe haven during turbulent economic times.

For a host of reasons, stocks and exchange-traded funds (ETFs) with higher dividends for shareholders often produce market-beating returns on capital during economic downturns. First and foremost, dividend-paying stocks are generally associated with dependable free cash flow, although companies in cyclical industries such as shipping or manufacturing are obvious exceptions to this rule of thumb.

Roll American currency next to a sign that reads dividends.

Image source: Getty Images.

Second, most management teams are reluctant to cut dividend payments. A cut in dividends means the company is under financial duress – and that’s a signal that signal management teams generally try to avoid sending to shareholders. Third, above-average dividend yields can help mitigate a drop in stock prices in the short term.

With all of this in mind, I think income-seeking investors may want to consider an addition Guggenheim Strategic Opportunity Fund (GOF -0.19%) And Fidos Investment (FDUS 0.15%) for their portfolios this year. Here’s why.

Guggenheim Strategic Opportunities Fund

Closed-end funds (CEFs) are a popular vehicle among income investors, largely because they tend to pay out higher than normal dividends due to their frequent use of leverage to magnify returns.

Guggenheim’s Strategic Opportunities is a prime example. This leveraged mutual fund has paid a fixed monthly dividend of $0.1821 per share since mid-2013. At current share prices, that equates to an annual yield of 13.5%.

From a total return standpoint, the Guggenheim Strategic Opportunities Fund has had slightly better returns than all of the major US stock indexes over the past three years.

GOF total return level chart

GOF gross return level data by YCharts.

The Guggenheim Strategic Opportunities Fund’s net asset value is down 19.7% over the past 12 months. Moreover, the fund’s share price fell by 18.4%. Despite this, it is still trading at a huge premium of nearly 23.3% at the time of writing. In the world of CEFs, premiums over 10% are considered “extreme” by most money managers.

A large portion of Guggenheim’s strategic opportunities says a lot about how investors view this investment vehicle. While it would be easy to interpret it as a red flag, I think it shows that investors have confidence in management’s ability to successfully navigate this turbulent market. The fact of the matter is, this fund has consistently paid the exact same dividend to shareholders for 117 months in a row. Moreover, CEF has never reduced its monthly payments since its inception in 2007.

The bottom line is that Guggenheim’s strategic opportunities have proven to be a reliable source of income in a variety of market conditions. This simple fact suggests that 2023 will be another year to hit the market for the fund and its shareholders.

Fidos Investment

Fidus Investment is a closed business development company. Its core business centers around providing debt and equity financing solutions to lower-middle-market companies – companies with annual incomes between $5 million and $50 million.

Fidus stocks have had better total returns than every major US stock index except NASDAQ Composite over the past ten years. In 2022, Fidus shares generate a healthy total return of 17.2% on shareholder capital; Meanwhile, the Standard & Poor’s 500 It’s down about 18.1% last year.

How does Fidus crush the broader markets? First, a dividend of 9.54% at current stock prices. This is definitely an attractive return for income investors. Second, the company’s top line is on track to rise 16.5% in 2023. As a result, Fidus should have ample free cash flow to support its above-average distribution.

And to keep with that topic, the company’s 12-month delayed payout ratio is just 42%. So, with income expected to rise further in 2023, Fidus will have no problem covering its impressive shareholder payout this year. This kind of built-in margin of safety could be a major catalyst for the company’s stock in 2023.

George Bodwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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